Considering a new investing position: fetal and 100% in cash?
I just returned from a trip to South Africa, and after ignoring the news for two weeks, I was a bit surprised to see the major market indicies. Guess what my (no-so-)new investment strategy is? Read my last post for an idea.
Today, my friend Dave sent me an article from today’s WSJ by Burton Malkiel (Economics Professor at Princeton and author of “A Random Walk Down Wall Street”) - it is a good, calming read. A couple good points:
from Keep Your Money in the Market, Oct 13 WSJ:
… just because stock markets have panicked, investors should not. The best position for investors today is not “fetal and 100% in cash.” We are not going to have a depression, and we have survived financial crises before. A century of investing experience, as well as insights from the field of behavioral finance, suggest that investors who bail out of equities during times like these are almost always making the wrong decision….
…By all means, young 401(k) investors, and those in their prime earnings years, who are stashing away funds from every monthly paycheck, should stay the course. If you decide to eschew equities during periods of ubiquitous pessimism, you will lose all of the advantage of “dollar cost” averaging (buying more shares when prices are low than when they are high).
Take human behavior out of your investment return equation. Make sure your investing plan is automatic. Don’t touch that dial on your 401k contributions. Rather, ask yourself if your asset allocation is correct, and if you can afford to increase the contribution percentage. Already maxing your 401k but have money left over from each paycheck? After filling up your emergency fund (3-6 months in cash/money market), set up an automatic monthly investment into a regular brokerage account in index funds.
My own [Malkiel's] calculations show that in the aggregate, investors who moved money in and out of equity mutual-funds underperformed the buy-and-hold investors by almost three percentage points per year during the 1995-2007 period.
Remember, the 3rd biggest mistake to make in investing is buying high and selling low. Moving money into cash right now is the best way to do exactly that. (What’s the first biggest mistake? Not saving enough. The second? Not investing.)
Take a deep breath, stop looking at your account statements, and get back to work!
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That’s fine, but does the advice differ for aspring writers and other artists who are simply waiting to be (inevitably) discovered, at which point the millions will start rolling in?
If I haven’t said it already, congrats on the blog, Alex.
15 Oct 2008 at 5:37 pm
Hi Ink, first off, having a brother who is pursuing a career in acting, I give you guys a TON of credit for going for it all, and following your heart. For writers and artists, my advice about your financial plan is the same as other 20 and 30-somethings. First, make sure you are not building debt (and are getting out of it, if you have credit cards), and that you are remembering to save. Establishing an emergency fund (in cash or equivalent, of 3-6 months non-discretionary living expenses) is just as important for you as it is for those of us in the banking industry these days - you never know when you might be out of your day job and need to get through until the next one comes along. After you start to build some savings that you know are for the long term (10-year horizon), then you should look at investing.
21 Oct 2008 at 10:05 pm